In-App Buying Drives Most iPhone App Revs

The art of the upsell is proving to be the real art of making some money from mobile content. The freemium model, in which a developer or publisher gives away their basic app for free and then uses in-app purchases or upgrades to get revenue, is driving the market.

In-app purchases are now responsible for 72% of revenue coming from the iPhone paid-app ecosystem, according to metrics firm Distimo. In revenue coming from some sort of app sale, 24% is coming from a paid app with in-app upgrades and 48% are free apps with paid in-app purchases.

In addition, 28% of revenue was coming from apps that simply had an upfront fee. Freemium is a relatively recent blockbuster on phones. Only a year ago, Distimo found that 28% of iPhone app revenue came from in-app purchases.

Still, in the Apple App Store only 4% of apps include in-app purchasing, although many of its highest-growing titles do include the model. On Android, 68% of the top 25 highest-grossing apps have in-app selling.

Freemium emerged quickly as the new model for monetizing mobile because the early download and sales patterns were clear about how much of a deterrent an upfront charge could be to entry. The volume of downloads for free apps is much higher than a paid app, even at these sub-$1 prices.

On the iPhone, there are only 8.7 paid downloads for every 100 free apps downloaded. In order to achieve necessary reach, free remains important. But once the publisher or developer has made a case for its app in the user's home screen, it likely has made the case for being paid.

Distimo also points out that tablets are a superb opportunity for monetization. In just the last year, the volumes of downloads being made to the iPad have begun to approach the levels we have seen for the iPhone. But the pay scale on tablets is higher. For instance, users seem more willing to access paid apps on the tablet.

While only 8.7 paid apps are downloaded for every 100 free apps on an iPhone, on the iPad there are 13.7 paid apps downloaded for every 100 free. The company calculates that the top iPad applications are already generating almost four-fifths the revenue of the top apps on the iPhone.

Mobile developers are discovering what game makers using virtual currency figured out years ago: flat fees may collect a set amount of revenue, but it sets an upper limit on how much your most loyal users can spend on your product.

One of the things that game makers like Zynga and others discovered on Facebook is that freemium models help identify the core of 1% or 2% of truly passionate users who were willing to spend multiples more than even a publisher would think to charge.